Yves here. Note that this post by Yanis Varoufakis is not inconsistent with the news story that we highlighted earlier: that German politicians are signaling they might not oppose having the ECB buy bonds along side the formal rescue facilities. The open question is whether any such intervention would be unlimited, and in his press conference yesterday, Draghi was evasive. The word from my close readers of the German press is the apparent shift in stance in Germany is not as large as it might seem, that the body language is that they would support only a defined amount of intervention, limited to short-term instruments.

By Yanis Varoufakis, Professor of Economics at the University of Athens. Cross posted from his blog

First came the impressive declarations: The ECB will do whatever is necessary to ensure that those who go short on the euro, who bet on its disintegration, will lose. “And, believe me”, he added “it will be enough”. He also, rather significantly, uttered the term ‘convertibility risk’ (code-words for the risk that funds kept in some part of the Eurozone will be forcefully converted to some new, devalued, currency) and pledged to eradicate it. No wonder, the markets responded with considerable enthusiasm.

Then came the moment to put up or forever lose his credibility. Alas, probably under incredible pressure from the Bundesbank, he opted for the latter. Citizens and investors felt a wave of desperation hit them and all the gains from the grand declarations fizzled out. Since then, some analysts went back to what Mr Draghi said during the Thursday press conference and read between the lines some evidence of actions-to-come that may offer relief to the struggling Eurozone. They are clutching at straws, I am very much afraid.

What was the ECB’s position before Draghi’s heroic declarations? It was that it cannot arrest the crisis unless member-states act as part of a Grand Deal on how to effect a Eurozone-wide fiscal policy. Then and only then, the ECB would bolster their efforts through its own monetary operations. Clearly, that position led markets to believe that the Eurozone had no credible plan for dealing with the Crisis, as the cart (fiscal union) was being placed before the horses (serious ECB-centred intervention to stop the death embrace between insolvent banks and insolvent nations).

And what is the Draghi position after Thursday’s crucial ECB board meeting? That the ECB is ready to buy bonds in the secondary market once member-states act as part of a Grand Deal on how to effect a Eurozone-wide fiscal policy. In other words, no change whatsoever. None! In this sense, the ECB’s position which was initially deemed inadequate was reiterated as fresh policy a few days after its President pronounced himself ready to implement a radically new policy. The end result is, simply, the loss of the ECB President’s credibility. Or, to put it differently, if Mr Draghi were once again to make a similarly large pronouncement (along the lines “we shall slay this dragon, whatever it takes”), there is no doubt that the market fillip that will follow will be much weaker than that we experienced last week. Thus, the office of ECB President has been diminished.

As if that were not enough, Mr Draghi has, possibly unwittingly, undermined one of the ECB’s cherished principles, without replacing it with some fresh (possibly more appropriate) principle. Which principle? The principle that the ECB does not meddle in fiscal policy and stays well within its remit of maintaining price stability and a healthy monetary policy transmission mechanism.

Consider this statement by Mr Draghi:

[The] guidance that we’ve given to the committees of the ECB differs from the previous program because … we have explicit conditionality here. And as a necessary condition, an adherence by governments and by euro area governance to its commitments.”

Let’s unpack this. The previous program he refers to is the flurry of purchases of Greek, Portuguese and Irish bonds during 2010/11, the purpose of which was to stabilise these countries’ spreads and avert their insolvency. That program failed miserably, in the end, even though it did manage to slow down for a while the rate of increase of these interest rates. What Draghi is now saying is that, unlike those purchases which the ECB made without imposing conditionality on the three countries involved, any new purchases will come with strings attached; i.e. with a Memorandum of Understanding between the ECB, the EE and the member-state whose bonds the ECB will be purchasing in the secondary markets. This is, in my view, the end of any pretense to keeping monetary policy separate from fiscal policy. In effect, the ECB gives itself the task of enforcing into member-states particular (and highly austerian) fiscal policies.

The issue here is not whether one agrees or not with austerity. The issue is that the degree of austerity, and the extent to which policies like privatisation of the electricity grid of a nation must be pursued, was never supposed to be the business of the Central Bank. These were matters for democratically elected governments. During 2010/11, when the ECB was purchasing stressed bonds, it did so on the basis that the debt crisis of these member-states was threatening the ECB’s capacity to determine interest rates in places like Greece and Ireland. Thus, it intervened in the secondary bond markets in order to repair these monetary policy transmission mechanisms. Meanwhile, whatever conditionality was imposed on Greece, Ireland and Portugal was imposed by the troika in the context of the loans provided to these countries by means of guarantees backed by the taxpayers of the surplus countries. In short, the principle of keeping fiscal policy and monetary policy separate was, more or less (and despite Axel Weber’s protestations), intact.

Now, however, Mr Draghi is proposing to scrap this principle by tying up his impending intervention in the secondary market for Italian and Spanish debt to particular austerian fiscal policies by Rome and Madrid. This abandonment of the formal divide between fiscal and monetary policy may not be a bad thing, per se. But let us be honest about it and call a spade a spade. The reason why a smidgeon of honesty is necessary here is because, now that the ECB has decided to go boldly into the realm of fiscal policy, it might as well push for fiscal policies that work; as opposed to the austerian ones that do not.

For example, given its new boldness, there is nothing to stop the ECB from declaring that it will set a limit of 3.5% to all spreads within the Eurozone, promising to buy however many bonds of any member-state whose spread from the bund exceeds 3.5%. What stops it now from making this declaration? The answer is: the myth that this would amount to crossing the Rubicon that divides monetary policy (the ECB’s tool) from fiscal policy (the area of responsibility of elected governments). But surely this argument holds no longer now that this Rubicon has been passed by an ECB President who says that he will use the ECB’s power to print in order to impose particular fiscal policies on the member-states that will be favoured by the ECB’s intervention!

In summary, in a few days, the hapless Mr Draghi managed to diminish the power of his office and permanently to blur the divide between fiscal and monetary policy without even opting for a foray into fiscal policy that may help the euro survive. Infinite are the ways in which Europe’s leaders manage to injure our common European home. May they cease and desist before it is too late.

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94 comments

Right up until this funny-money monetary system collapses, I will enjoy pointing out the fact that all this finance stuff bears little relation to reality. The Greek, Spanish and Italian people are starving because of the laws of thermodynamics, not because of monetary/fiscal policies.

People need food, clothing, transportation. Focus on these needs and they have no use for worthless pieces of paper. Focus on free, and your country will become an entitlement society that won’t produce and cannot survive.

So the issue is not only the currency, it’s the growth of entitled within these fiat regimes. The laws of physics say more paper will not give you more food, or clothing, transportation, or medicine. We are already seeing the clash between the entitled and non-entitled. There has been a huge spike in entitled, while the pool of non-entitled shrinks.

No, there has been a huge spike in the wealth of the tiny group of truly entitled — bank owners, corporate magnates, those with inherited fortunes — and the pool of NON-entitled (the poor, near-poor, and hanging to the middle class by their fingernails folks).

The rich tell an entrancing lie about “entitlements.” THEY are the entitled ones, not the rest of us.

Oppressing is one thing, reality is another. Where have I defended banks? Not all are thieves, you ought to know that. Heck, rich is relative, so me and you might be rich to more than 3 quarters on this earth.

So why don’t you be a hero and explain to the how the rich, beard and Carla, are screwing the poor. Yes, you are rich my friends, you are in the top 25%. So away with the excuses.

Now, you go and ask your leaders to grow some. Ask that they tell the truth instead of what people want to hear.

We need to end collective bargaining because it drains capital from tax payers to the few, rich, union thugs.

We need to stop bailing out banks because it also drains capital from tax payers, and those on fixed income.

We need to stop implementing policies that benefit a few rich.

We need to stop subsidizing industries because it, not only drains capital from payers, it increases prices.

Above all, we need common freaking sense. This entitlement crap is making me nauseous.

Europe is a kleptocracy. The euro was always a con. The ECB was always a part of the con. And Draghi is one of the keepers of the con.

Kleptocrats don’t do solutions. They do looting. I would think this would be obvious now that we are past 20 such “solutions” and marching bravely toward 30. I mean we have had 3 just in the last few weeks: the last euro-summit, and Draghi I and II. Draghi has only diminished his office if you think that he and the ECB ever had any credibility or were ever working in good faith. Facts not in evidence for a long time now.

How many more times do we have to pretend that any of these “solutions”, all of this toing and froing is supposed to mean anything other than keeping the looting going for as long as possible?

Humpty Dumpty fell off the wall already and all the talking heads missed it, but now we have no shortage of words decribing their various solutions.

Since this involves the art of sticking 10 pounds of shit into a 5 pound bag – the only place they can think to put the mess is in the ECB because they have some vague notion that a printing press resides there and that will make anything better.

So this author believes that giving unfettered monetary AND fiscal power to one man (ex Golmanite no less) is a good idea.

Whenever there is a post on this subject, I check — usually in vain — for a comment like yours that shows some evidence of basic sense. It really hasn’t been that long since all of the supposed remedies for this crisis would have been derided as the worst of Banana Republic thinking. Now sober-sounding individuals talk about them as though they were reasonable. So, thank you! I am always glad to know that there are others who still believe that the dangers of removing honest price discovery cannot be waved away just because we are in a crisis and are desperate to get out of it.

“removing honest price discovery”? Don’t make me laugh. It was basel-2, not the “printing presses”, which prevented price discovery, by defining all OECD debt as equally safe (allowing banks to not post any collateral whatsoever against Greek etc. debt). And then there’s the issue of the banks being allowed to mark to myth/model, which is being used to prop up the housing market. (Described in excruciating detail by Yves among others.)
So please tell me: what is this ability for “honest price discovery” you fear is being lost? And why is this suddenly important once people are mentioning the word ‘printing press’, when it was never even discussed while the banks were having their party between at least 1998-2011?

You missed the point: the 3.5% ceiling idea was just an example of a policy that is no longer out of the question now that ECB is contemplating crossing the monetary policy/fiscal policy divide. It was not being proposed as a wise idea in and of itself.

So, I shouldn’t make foppe laugh? (See above.) Well, how about you? Seriously, how often is there an opportunity for us to do anything else about all of this? You toss off the “gold bug” insult, which gave me a hollow laugh, and then there’s foppe, who makes jokes about how our broken sovereign debt markets are nothing we haven’t seen before, and I think, is there anyone actually working in the financial sphere who isn’t laughing?

Anyone who expects the ECB to have the power and the credibility of the US Fed. is dreaming. This does not concern the credibility of the ECB or Draghi.

Rather this problem concerns the credibility and sincerity of each Euro nation. So unless Greece (rotten overall), Spain (rotten regional governments & banks) and Italy (one name: Berlusconi il Duce) restore their credibility, pouring money into the system won’t do anything.

Does anyone remember that Greece cooked its books to get into the Euro and that the tax evasion rate in Greece is close to 40%?

And do they want the ECB to pump money into their rotten system without conditions? That ain’t gonna happen! I would give Draghi a huge credit for saying so. It is the only credible position the head of the ECB can take, no matter what the Greeks or the Germans want.

Wow, you finally give in. Your head is harder than mines. You said it.

The “can”, but you know they won’t. They won’t because they are capital impaired. They won’t because there is no one to lend to.

Whether you admit it or not, it’s not the same. You give this money to people in the form of notes and you can count the dollars’s days.

So the the fed is constraint by insolvent banks, capital is not debt, and insolvent customers. The fed cannot print, as I said. Even if it could, it wouldn’t because, as you know, the fed works for banks. And banks don’t want worthless notes for their loans.

Congress will most likely, to our own destruction, implement some stupidity like MMT. Shortly after, most will resort to either gold barter. And you beard, you will be walking around with all the worthless pieces of paper you want. Likely no food for the taking, but all the garbage paper you want.

To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited. from http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html

Who said it was free? The banks have to buy cash from the Fed with their reserve balances. And if a bank has more cash in its vault than it wants to keep there it can sell some of it back to the Fed for an increase in its reserve balance.

Darias: That is actually correct – the real economic power is fiscal, exercised by Congress through the Treasury. The Fed can only do monetary – it can only exchange currency it prints as Beard says for existing financial assets, like Treasuries, which is a far lesser power.

Congress has the power of destroying the currency by printing. Does that think this the solution have explain how diluting the currency is going to make us richer, and where does it stop?

The day they print the first buck, the day I buy gold…

Uh, Congress, through the Treasury has been printing trillions of bucks since the crisis started. That’s what a budget deficit is – how many net bucks have just been printed. You are a little behind the times there. Where on earth do you think US dollars come from, if not from the government printing them? It’s disguised with a stupid shell game of saying the Treasury can only print Treasury bonds, and locating the power to exchange them, before maturity, for ready money in the Fed, but that doesn’t really mean much.

In some economic situations, pretty clearly the one obtaining at present, printing currency, lowering rates will be less inflationary than “printing bonds” – raising interest rates, contrary to robotic mainstream assertions. What you maintain will vaporize the currency would strengthen it.

And of course the problems in Europe have nothing to do with the laws of physics or real economic concerns, but are entirely due to a tiny entitled plutocracy creating poverty amidst plenty by an unworkable monetary system. The people you seem to derogatorily call entitled (e.g. “union thugs”) ARE justly entitled because they work for their living, which is then robbed from them by these criminal plutocrats. But you might have to study some economics to learn how their scam operates.

Let’s see if I can enlighten you. You are correct, the us is running deficit, but again, it’s not equivalent to printing and giving it to people.

Cash is capital, it’s earned today and it’s in your pocket. Credit is an IOU with the hopes of paying tomorrow. It does not mean it will be paid.

This is important to understand, because they behave differently. More that the ability to create inflation diminishes as more debt is taken on. There comes a time where more debt does not add to GDP, aka, now.

Now, try printing 6 trillion and hand it out to people and you will see the difference. MMT is insanity.

the us is running deficit, but again, it’s not equivalent to printing and giving it to people.
It most emphatically IS, exactly IS doing just that, not just “equivalent”.

Yes, that is the modern mainstream nonsense. It is amazing that people can actually believe this preposterous, innumerate twaddle. I’m not the one that needs enlightening. :-)

A dollar bill is an IOU, just like a bond. They’re just two pieces of paper with different dates printed on them! They are OBVIOUSLY practically the same thing. Everybody used to know this, back when sane economics = accounting = adding & subtracting correctly = MMT = Keynesian economics ruled the roost. Was called the postwar golden age, the greatest period of prosperity the world has ever seen. FDR’s 2nd Fireside Chat: (“Government credit & government currency are one & the same thing”)

In times like now, like the Great Depression, adding to govenment debt, whether by printing bonds or printing money (twin brothers), magically expands the economy very quickly, magically creates real wealth, better than at most times. And just printing the currency would be less inflationary, a ludicrous fear, than pretend “borrowing” it with bonds, which is a silly shell game that I don’t think you understand.

You folks keep blaming money, but none have the balls to admit we need more productivity.

You know I have a friend that runs a law form, he can’t find any people willing to take, what I call high skilled well paid mobs. some would rather get a check from uncle Sam than get their assess producing.

You are living in fantasy. You think more, albeit diluted, paper will make us rich. You have wasted your time looking at mmt, fantasy, and don’t get that dollars are simply a measure of things. Issuing more will not make us richer.
irrespective of whatever you want to believe, you will get to set this with your own eyes.

France is using most of these stupid policies, except printing. Let’s see how well this spreading the wealth bs works.

Darias: The food is there.
The productivity is there.
Where is the natural catastrophe that destroyed Europe’s, Greece’s, Spain’s capacity to provide for itself? Was doing fine before the purely financial, purely monetary, purely organizational problems of the GFC displayed the underlying purely financial unworkable instability of the Euro.

Nothing to do with productivity – except that there is too much of it!

**********

Pretty much the situation in Europe is like this, only a little more complicated:

Europe superproductively produced a great storehouse of food.
Access to the storehouse is determined by coupons called Euros.
The stupidest person in Europe, called “E. C. B. Bundesbank” is given the task of running the storehouse & printing the Euro coupons. He hits the wrong button, doesn’t print enough. Not enough people get the coupons.

So he doesn’t let them into the storehouse. They die.

The End.

****************

We don’t “have the balls to admit we need more productivity”, because our balls are not rattling around inside our skulls, which is where they need to be to believe such nonsense.

Not your fault, Darias, this stupidity is everywhere, you didn’t invent it, but such ideas are incredibly stupid, and insult the intelligence of a child.

Everybody knows, every child understands MMT = accounting. Takes a lot of education in insanity to believe the nonsense you have been taken in by & repeating.

Well, yes. But, hum, they did it with the help and/or connivance of GS (Draghi, anyone?) and the European institutions. If not for that, they would have kept out of the euro and be spared their present predicament.

So the blame should be shared around in a solidary manner, to put it in PC terms, don’t you agree?

The truth of the matter is that the euro was a political project of the Eurocracy. Facts had to be made to bend to ideology in order to launch the whole thing. It could not be otherwise.

And now the populations of southern Europe, always ignorant of the nature of the project, are made to pay the price.

Haven’t Greece and Spain received billions that they will never pay back?

These countries have some to blame, themselves, and their leaders for not having the balls to tell them that money isn’t just free. Anyhow, you will see them exit and devalue their currency to worthlessness. They won’t be better off, but print they will.

This is why Keynes objected to an international system that allowed countries to run persistent trade surpluses. They do damage to their trade partners if there is no mechanism to allow for currency adjustment. France having its exchange rate set too low relative to gold in the 1920s was one of the less discussed drivers of the Great Depression (in general, the effort to go back on the Gold Standard after it broke down in WWI was a driver of the Depression, see Peter Temin on this).

When private companies engage in stupid vendor financing, they go bust. Carly Fiorina destroyed Lucent that way. Its stock was trading at something like $100 a share in the dot com mania. Carly (then head of marketing) was selling equipment to dot com startups who’d clearly never have any money (that was the explicit strategy of those companies). I don’t recall the exact arrangement (whether Lucent took stock or warrants) but they had to write off a monster % of their total sales over that period. The stock went as low as close to a buck, and it went higher in the single digits before it was broken up into three businesses. And Carly goes on to be CEO of HP. Well played!

It’s curious that you lump a national government and an investment bank in the same category, imagine that they have similar obligations to the citizens of the former, and that there is some mechanism available to bind the latter to finding a magical solution to the crises it helped create.

That has the scent of hope driven by desperation.

I mean yes, GS is a criminal organization full of criminal scum.

But if you were a Greek citizen, who would you believe responsible for managing the public finances of your nation for the benefit of your society as a whole?

And if you would agree with me on the common sense answer… what really is the point of your argument? Seriously, the Greek government is not to blame? There’s blame to go around, so we should… what?

Is it my fault if your family, God forbid, had nothing to eat? Come on guys, it’s common sense. Goldman is definitely at fault of questionable business practiced, but the same Greeks and their government have dug their own grave.

Not that the Greeks don’t have a monster problem with a defective tax system (the 25-40% of the people whose entire income that is in the reach of the taxman actually face a pretty high tax burden) but it takes two to tango. Greece was a clear problem even before the crisis broke out.

I understand that, following the idle pressers this week from both ECB and Fed, there has been movement out of German and into Spanish and Italian paper. If true, might these be coordinated central bank moves, undertaken while the news cycle – and blogosphere – are otherwise diverted?

Just whose sense of entitlement are you referring to? The bankers who insist on public money to cover their bad bets, the corporations that demand endless wars to capture other peoples resources, the politicians who expect vast wealth as the reward of service to the finanical kleptocracy?

The euro is a currency without a political construct, its historically unprecedented, in fact you could say its completely backward. They are now trying to build a political construct using the euro, you would say this is doomed to failure, except for the fact that the one thing the last four years has shown is there is no politics of any sort in Europe and the US. Its not even interesting to watch.

The fiscal/monetary distinction is a canard, always has been, however politically since the creation of the Fed it was important in the sense we gave the banks the license, for the most part the ability to create money, which they have used over time to takeover the fiscal process, we are ruled by banks with to this point no political opposition.

JC was certainly more of an anarcho-pacifist than a compliant citizen. Enough of that tiresome “Render to Caesar” bromide. How about, “Render to Caesar (what came from him and what you wickedly possess, especially after your endless preaching about ‘graven images’).”

Not so fast with the trolls card. I did consider the possibility that the “you” in the quote might be taken as a reference to you rather than JC’s hypocritical entrappers. In the interest of brevity, I left a clarification out, thinking it unnecessary. Obviously a mistake. I doubt the majority of readers shared your interpretation. Mr. Beard, what a thin skin you have! A surprise to me, having read a number of your comments.

Still, this “and what you wickedly possess” is putting a false interpretation on the Lord’s words, imo. Since people are REQUIRED by the Lord to pay Caesar’s taxes then how can it be wicked to possess the means to do so? The poll tax, to my knowledge, was inescapable so one could not shun all contact with Caesar’s money.

And as for our duty to pay taxes at all, Romans 13:1-7 makes that abundantly clear and Peter says something similar.

True, on this topic that is. I recently severely impaired my friendship with a Christian anarchist because I advocate a government solution to our current economic problems. I’m still hurting over that loss.

Apology appreciated. This may be of interest. When I was briefly at the NY Catholic Worker in ’52 (I was a CO in the Korean War. Unlike Cheney, I purposely left college to face the draft), we dug up reputable Biblical scholars to argue for anarchist and pacifist interpretations of Matthew 22:16-22 and Jesus and the Money-changers (all 4 Gospels), respectively. In the latter case, it was argued that there was some linguistic evidence that the operative verb was “shoo” rather than “drive” or “whip.”

The ECB and Draghi will retain credibility far more than most people here suspect because of their retained ability to set sovereign debt yields at any level they choose. Yanis points out a more subtle fact about the ECB I think most in the MSM miss, which is that the ECB’s goals are far different from Euro citizens. The ECB will only act on the condition that govts implement fiscal consolidation and structural reform, which ensures the crisis of high unemployment and low growth continues for quite some time. These are the ECB’s Means (Lost Decade With High Unemployment) To An End (Structural Reform)http://bubblesandbusts.blogspot.com/2012/07/ecbs-means-lost-decade-with-high.html

I doubt markets believe him. They just use his pronouncements to goose the action for a few days and fleece unsuspecting rubes. The elites, well probably. Both of them work for the looters. The people are irrelevant in all this, at least as far as Draghi is concerned.

I wouldn’t disagree with the view that some market participants are using Draghi’s statements to convince the greater fool. However, that suggests to me there are enough greater fools with whom his credibility remains intact. That’s an important recognition for investors.

As for elites, I also agree with you since the ECB’s policies are highly favorable to that class. And yes, structural reform is a form of looting. Sadly, until enough people realize this the policies and misery will continue.

Two thoughts. The first is that it is wise to revive the term “political economy,” because politics and economics are inextricably intertwined, and as Karl Polanyi pointed out so well, no one can live with “pure” free markets – left and right intervene to ease the pain of a force that is inhumane when wielded over the heads of societies.

Second, look beneath the rhetoric of the auterians, whatever “office” they hold in the public and private sector, and one will find deep social engineering embedded in that term “conditionality.” Austerity means longer hours, lower wages, and the dismantlement of what remains of social democracy. The remnants of the mixed economy will be turned over to the private sector, invoking the magic of “markets,” which in turn are dominated by the largest existing economic forces. If you need any proof of this, just follow the news on Wall Street and high finance, and the world of trading. Readers who haven’t visited Wendell Berry’s Jefferson Lecture from the spring of 2012 can now understand, thanks to high speed trading, just what Berry meant by the phrase “the inhuman pace of technological change.” It takes courage to say that to the technology worshipping elite who heard his lecture at the Kennedy Center in DC.

How the austerity being recommended, and now imposed by conditionality pulls economies like Spain, Greece and Italy out of the deflationary dive they are now caught up in takes us back to the 1930’s, Keynes vs. Hayek, details different to be sure, but fundamental dynamics quite similar.

And Yves, thanks for the Kalecki post from a couple of days ago. Those war years of 1943-1944 delivered the West some of the best economic thinking in our long history. But it is telling how Hayek’s 1944 book dominates Polanyi’s “The Great Transformation” of the same year in terms of popular and professional economic opinion, an accurate barometer of why the left is losing the current political economy debates.

because politics and economics are inextricably intertwined, William Neil

Much more than necessary because of our combination government and private sector money supply. Otherwise, government money mismanagement would be a problem for government and its payees only and private sector money mismanagement would only be a problem for the private sector.

Because austerity is the pound of flesh. And also a stealth tribute because everyone has been trying to pretend that austerity is somehow not fiscal policy! Yaroufakis just blew them out of the water. And if you carry his logic out just a bit it is obvious that it is totally self defeating for even the surplus countries because all of these economies are fiscally connected. It is absurd. The fiscal/monetary alchemy of transforming interest rates into austerity is a time bomb because it will make anything fiscal completely pointless in the end because who cares about anything fiscal if there is no functioning economy, etc. I thought this was an absolutely profound analysis – since I probably missed the point several times previously.

I’m not cheerleading for Draghi to do more. Yanis and I separately are pointing out he has raised expectations beyond what he can do and is trying to stare down the markets until Sept. 12, when he hopes the combination of having the ESM in place (assuming the German Constitutional Court lifts the injunction, which seems likely but nothing is 100% certain in this world) and he will have persuaded the Germans to let him do some bond buying along the side of the rescue mechanisms. Note that unless he gets authority to go unlimited or very very large in his bond buying, even this program won’t be sufficient, but it will buy more time, unless Greece gets kicked out of the Eurozone (that will accelerate the bank run in progress, unless he gets a deposit guarantee across the Eurozone first. He seems aware of that). But even getting all the moving parts in place means that deflation will move to the core countries.

It’s like choosing between a full blown crisis now or having a worse version of a Japan style outcome (the Japanese maintained social cohesion, while this abrupt rendering of the social contract is already producing dislocation and protests, and you ain’t seen nothin’ yet).